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Interesting Thoughts On The Local & State Gov’t Crisis

12 January 2011 9 Comments

Local and state governments are in terrible terrible shape.  States like California, Illinois, New York and even Florida where I live face serious challenges ahead.

The explanation is easy and is actually very simple.  The states have spent way beyond their means for far too long.  A “growing” economy for decades was able to mask the troublesome behavior, but once the growth stopped a few years ago, the crisis bubbled to the surface.

States are doing their best to combat the situation by doing some cuts – Illinois raised the income tax just yesterday I believe.  The reality is though that there’s a slim slim chance that these states can cut enough and raise taxes enough to actually get on solid footing.  I think the turn around point was years ago.

I was listening to Meredith Whitney on CNBC this morning who is a very sharp woman (famous for predicting the banking crisis of 2008).  She’s made some news recently by providing thorough and detailed analysis on the state and local government financial crisis that is starting to appear.

One of the more very interesting points she made was just how impactful state governments making huge cuts will be to the overall economy.  State governments employ hundreds of thousands of people.  The impact to unemployment and GDP as a whole will be severe when these governments have to slash workforces.

I’m not sure the Federal government will allow this to happen as they continue to try and prop up the economy.  With that said, a Federal bailout of specific states will be political suicide.  Imagine a taxpayer in Texas having to fund a bailout of California!  The solution then will probably be the Federal Reserve because Ben Bernanke isn’t impacted by the political will like, say, Barack Obama.  The Fed will bail out the states and further devalue your currency in the process which is essentially the same as a taxpayer in Texas funding a Congress-led bailout of a state like California.

We’re all on the hook, and we’re all getting screwed.

At least those school administrators will get to keep their $200k annual pension though through retirement.  That’s the priority of course.

On the investing side, you got to be nuts to be buying the stock market right here.  It’s very, very high, and there is serious volatility ahead whether it’s Europe or California.  When news of a potential state default hits the airwaves, stocks will drop like a rock.  If you want to buy stocks, wait for a moment like that.


  • Rob said:

    Public unions need to be stopped. ~3+ billion of the 7 billion that the income tax increase in Ill. will result in (allegedly, assuming people don't just jump ship altogether) will be used to pay pension payments.

    We need politicians who stand up to the mob mentality of unions. Not who bait and switch as long as they get their kickback.

  • TaJ said:

    Yes, let's not focus on the fact that pension systems are just another off-balance-sheet vehicle for political corruption between civil administration and finance. It's all the fault of unionized workers.

    Defined-benefit pensions are screwed, but they were always a bad idea. No entity which can't print its own money should be allowed to promise arbitrary future payments.

  • TaJ said:

    It's hard to say which would be worse, bailing states out or NOT bailing them out. I mean, either way, don't expect it to be pleasant. All of the options are bad.

    Part of the reason to suspect that they won't be bailed out is that bankruptcy would almost certainly entail major changes to the pension system and mortally wounding public employee unions. This would be a huge tactical win for the Republicans, as unions are pretty much perma-Democrat. Wether it's a strategic win on the other hand…

  • Arthur Garcia said:

    I totally agree with this post. The only viable solution to America's debt buble is devaluing the dollar (Quantitative Easing). I would argue that Inflation is already here. Food prices and commodites (Sugar, coffee, turkey, gas, oil, etc) are already through the roof. The mistake people are making is confusing an increase in the price of Gold and thinking the value of Gold has gone up. The reality is they are watchiing the buying power of the dollar go through the floor. People who aren't watching and paying attention to these signs are going to get slaughtered out there.

    A really good strategy is to invest your wealth in assests (rental property) that can be locked in by fixed rates. As inflation rises, your money (down payment), will be protected by the balance of the loan (which the tentant is paying off). Other than that, I don't really see any other options that aren't merely financially defensive – silver, good, etc.

  • Ori said:

    So they need to do the same thing:

    So now the point is to take the states to point of bankruptcy and them go to the unions and say, "look, we're F'd. We can lay you all off, every single one of you and MAYBE balance the budget, or you can take this deal for lower wages, lower benefits and take care of your own retirement." The states then do a single bond issue, 20 years, dump that money on the unions and eliminate their ongoing costs. The bonds would be attached to a temporary tax increase (see, that's how you sneak a tax increase in to balance the budget!) which would, in the end, shrink the government, balance the budget and save the states from bankruptcy.

  • Russ Tarvin said:

    Please don't forget that California has been a provider state for decades. Living in California I don't like what my state has become, and would like serious reform, but I feel that if we did our reform, so as to not waste the money the feds give us (however that is, union reform would be GREAT!), the country should step up and help us. There are states that have to get federal funding to fund their state government, and those states should now share the burden.

    The other way it could be attained is for California to start keeping more of the taxes that get collected from the over 10% of the US that lives inside it, instead of sending it to the federal government and then having to beg for it back. Remember, California pays taxes too.

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